Why RBI disagrees with market perception on policy normalisation

RBI's announcement of liquidity absorption through the variable reverse repo auction was interpreted by the market as an indication of withdrawal from the accommodative stance

Since the announcement of the monetary policy review in the first week of August, most market participants interpreted liquidity absorption through the variable reverse repo auction (VRRR) as an indication that the Reserve Bank of India (RBI) has started unwinding its ultra-loose monetary policy.

In other words, the central bank seems to have started tapering the easy money policy that started with the nationwide lockdown imposed in the last week of March 2020 to curb the spread of coronavirus.

The yields on the 10-year government paper rose as much as 4 bps immediately after the VRRR announcement on August 6.